The Effects of Market Capitalization Ratio on GDP Growth and Capital Market Robustness in Newly Industrialized Countries

The objective of this study is to explore the presence of a causal relationship between stock market development and economic growth. This study aims to explore this relationship in the nine Newly Industrialized Countries (NIC’s): Brazil, China, India, Malaysia, Mexico, Philippines, South Africa, Thailand and Turkey. 2005 nominal GDP values are used as a proxy for economic growth, and market capitalization ratio (MCR) is used as a proxy for stock market development. To address this relationship, a Granger Causality Test was employed. However, before running a Granger Causality test, it must be determined whether the variables are stationary and, if not, whether they are co-integrated. To test whether variables are stationary, an augmented Dickey-Fuller unit root test (ADF) was employed. All of the countries rejected the null except for Mexico. Following an ADF test, an Engle-Granger Co-integration test (Engle test) was employed. Mexico failed to reject the null for the Engle test; thus no accurate conclusions for Mexico can be made following this study. Finally, the Granger Causality Test can be employed. Results show bi-directional causality for China, Thailand and Turkey between GDP and MCR. Unidirectional causality for MCR to GDP exists for India and Mexico. Uni-directional causality for GDP to MCR exists for Malaysia, the Philippines and South Africa. No causality is determined for Brazil. The results show that the financial markets are important for economic growth in India, Mexico, China, Thailand and Turkey. It is important to remember that this causal relationship is country specific. Therefore, a general statement cannot be made that the stock market causes economic growth.